What is a bond with an embedded put option?

An embedded option is a provision in a financial security (typically in bonds. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period.) The only restriction in such a case is that the options cannot be mutually exclusive.

Does Merrill Edge automatically exercise options?

Automatic Exercise/ Assignment 01 or more at expiration, they will be automatically exercised upon expiration unless contrary instructions are submitted prior to the applicable exercise cutoff times. For more details, refer to the Merrill Options Agreement.

How do you value bonds with embedded options?

According to the arbitrage-free framework, the value of a bond with an embedded option is equal to the arbitrage-free values of its parts—that is, the arbitrage-free value of the straight bond and the arbitrage-free values of each of the embedded options.

What are the two common types of option embedded in a bond?

There are several types of options that can be embedded into a bond; common types of bonds with embedded options include callable bond, puttable bond, convertible bond, extendible bond, exchangeable bond, and capped floating rate note. A bond may have several options embedded if they are not mutually exclusive.

What is a covered put option?

A covered put is an options strategy with undefined risk and limited profit potential that combines selling stock with a short put option. Covered puts are used to generate income if an investor is moderately bearish while short a stock.

How are puts exercised?

A put option is a contract that gives its holder the right to sell a number of equity shares at the strike price, before the option’s expiry. If an investor owns shares of a stock and owns a put option, the option is exercised when the stock price falls below the strike price.